Archive for the ‘Alternative Investments’ Category

A recent Bloomberg article details Google’s corporate structure, which moves revenues to subsidiaries in low-tax countries such as Ireland, Bermuda, and the Netherlands, with the result of reducing corporate taxes in those countries that are their largest markets: the United States and United Kingdom.

Google’s not alone, of course. Both Facebook and Microsift use similar tax structures, and a US Treasury measure to tax monies moved between international subsidiaries was halted by what we’ve come to know as the “political process”:

Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Center for Responsive Politics.

After a tumultuous week that saw two sharp dips in the Shanghai Index, Tuesday saw the market end in positive territory, after being down 7% earlier in the trading day.

What gives?

Investors in China and other emerging markets should be aware that these are high-risk investments, and therefore will experience higher volatility than investments in the more mature markets of Western Europe, North America, and Japan.
The recent dips experienced in Shanghai are the direct result of a change in China’s taxes on stock investments. The change was implemented to detract speculators from high-risk short-term investments. It is the first step in the maturity of China’s Finance Ministry, which is implementing long-term solutions to the rapid business development issues the country is facing.

Though it is likely that highly volatile days like the ones we have seen will happen again in China, the long-term trend should remain positive, as its development is just underway.

U.S. stock markets notched their poorest performance since September 2001, right after the terrorist attacks on the World Trade Center and Pentagon.
The Dow fell 416.02, or 3.29%; the Nasdaq dropped 3.9%; the S&P 500 index fell by 3.5%. Earlier in the day the Dow had dropped over 500 points. All thirty stocks in the average were down for the day.
This fall comes on the heels of the worst day in ten years for China’s Shanghai Composite Index, which fell 8.8% yesterday.

The U.S. Equity selloff was greater than any other market, except for China, though the effect was global.
Weakness in Asia has spread global, as Japan’s Nikkei and Topix notched losses of 0.5% and 0.3%, respectively.

The United Kingdom’s FTSE and the German DAX were both down 2.3%, and the French CAC-40 dropped 2.6%.

It is possible that the bloodletting is not over, with U.S. equities, typically less volatile than emerging and developed global markets, being hit so hard. Such a selloff on Wall Street is likely to shake European and Asian markets during the coming trading sessions.

Bonds posted strong gains throughout the day, and, along with dividend-paying stocks that have been hit significantly, are expected to provide stability in the coming trading days.

Stocks are sharply down Tuesday, with the Dow down 1.6% and the Nasdaq down 2.5%.

While this is being called a correction, it certainly has many investors concerned, but the main concern is the damage done to emerging markets and, in particular China, which appears to have quite a way to go before hitting bottom.

Risk-averse investors should take note, however, that volatile times are among us, and there are safer bets than the current buying opportunities presented by the recent declines.

Buy-write describes a hedging strategy in which a security is simultaneously bought and call options are written for the same security. Options are considered to be extremely risky, and used with caution and professional advice.
A recent study at the Center for International Securities and Derivatives Markets at the University of Massachusetts’ Isenberg School of Management determined that a buy-write strategy consistently improved risk-adjusted performance over a ten-year period (Jan. 18, 1996 to Nov. 16, 2006).

The study compared the Russell 2000 Index with one-month on-the-money buy-write strategy as well as a 2% out-of-the-money strategy and a 2% in-the money strategy.

The index overall performed better than the buy-write strategies over the ten-year period, returning 10.67% annualized, while the buy-write strategies performed similarly on a risk-adjusted basis, particularly the on-the money strategy, ranging from 9.21% (ATM) to 10.60% annualized (OTM).

During the unfavorable market conditions (January 1996-Febryary 2003), however, the buy-write strategies handily outperformed the index.

Significantly, the buy-write strategy lowered volatility enough to show that the strategy can outperform the index by neutralizing the effects of market fluctuations, while not sacrificing the gains of an up market.

The study does, however note that returns for the buy-write strategy are less normalized than those of the index, and, therefore, risk measures other than volatility may be more appropriate. Further, the study suggests that a more active approach, based on valuations and call selection, may significantly boost returns, both absolute and risk-adjusted.

Crude oil rose over 5% and Natural Gas was up as high as 12% on news that the winter in the United States is about to get colder, and talk that Saudi Arabia may curb oil production. It is likely that this surge is not over, and many economists feel it may develop into a long-term trend toward $60-plus per barrel, considering not only consumer demand during the summer, but also investor demand during the hurricane season.

The Federal Reserve began its policy meeting today and is expected to keep interest rates stable. Numerous statements have indicated that core inflation is at an acceptable level and a recession is not likely. Fed officials have recently stated that rates are “well-positioned” for any unexpected events in the near future.

The National Association of Realtors announced a sharp drop in existing home sales in December 2006. According to the report, existing home sales fell by over eight percent in 2006. Also, a number of homebuilders released sobering forecasts for 2007.

Heavy selling in the bond market led to the highest yields in five months. The 10-year Treasury finished the day at 98 3/32, with its yield at a lofty 4.867%.

Turbulence in the housing and bond markets seeped into the broader market, sending the Dow down 1%, while the S&P 500 and the Nasdaq slipped by 1.1% and 1.3%, respectively.

The day’s winners were eBay and Nokia, up 8.2% and 4.5%, respectively. eBay posted sales growth of 29% while Nokia announced a 19% increase in profits.